Chapter 14 Unit 1: Bank Audit (IRAC Norms & Statutory Regulations)
1. IRAC Norms & NPA Classification Criteria
An asset becomes a Non-Performing Asset (NPA) when it ceases to generate income for the bank.
| Facility Type | NPA Trigger Criteria |
|---|---|
| Term Loans | Interest and/or installment of principal remains overdue for > 90 days. |
| Cash Credit / Overdraft (CC/OD) | Account remains "Out of Order" for > 90 days. |
| Bills Purchased & Discounted | Bill remains overdue for a period of > 90 days. |
| Agricultural Advances | • Short duration crop loans: Overdue for 2 crop seasons. • Long duration crop loans (crops > 1 yr): Overdue for 1 crop season. |
| Credit Card Accounts | Minimum Amount Due not paid fully within 90 days from next statement date. |
An account is treated as "out of order" if:
1. Outstanding Balance exceeds Sanctioned Limit / Drawing Power continuously for 90 days; OR
2. Balance is within limit, but there are no credits continuously for 90 days, or credits are insufficient to cover interest debited during the same period.
2. Master Provisioning Requirements Table
| Asset Classification | Time Period in Category | Secured Portion Provision | Unsecured Portion Provision |
|---|---|---|---|
| Standard Assets | Regular servicing | • Direct advances to Agri / SME: 0.25% • Commercial Real Estate (CRE): 1.00% • CRE - Residential Housing: 0.75% • All other loans & advances: 0.40% |
|
| Sub-Standard | NPA for ≤ 12 months | 15% | 25% (Infra loans: 20%) |
| Doubtful 1 (D1) | NPA for > 12 months up to 24 months | 25% | 100% |
| Doubtful 2 (D2) | NPA for > 24 months up to 48 months | 40% | 100% |
| Doubtful 3 (D3) | NPA for > 48 months | 100% | 100% |
| Loss Assets | Identified by bank, auditor, or RBI inspection as uncollectible | 100% | 100% |
NPA classification is determined borrower-wise, NOT facility-wise! If one facility of a borrower turns NPA, all facilities granted to that borrower must be classified as NPA. Exception: Bills co-accepted by other banks.
3. Audit Verification of Advances & Drawing Power (DP)
• Paid Stocks: DP is calculated strictly on paid-up inventory (Gross Stock minus Creditors / Trade Payables).
• Stock Audit: Mandatory for large exposure working capital accounts (typically limits ≥ ₹5 Crore).
• Old Stock Statements: If stock statements are older than 3 months, the account is deemed irregular, and DP cannot be allowed → potential NPA trigger!
4. Long Form Audit Report (LFAR) & Regulatory Filings
| Report / Filing | Coverage & Filing Requirements |
|---|---|
| Long Form Audit Report (LFAR) | Detailed questionnaire covering advances, cash, deposits, internal controls, fraud, KYC/AML compliance. Branch LFAR submitted to Statutory Central Auditors (SCAs) within prescribed timelines. |
| Statutory Liquidity Ratio (SLR) & CRR | Audit of 12 selected odd dates to verify compliance with Sec 24 (SLR) and Sec 42 of RBI Act (CRR). Weekly reporting accuracy verified. |
| Basel III CRAR (Capital to Risk-Weighted Assets) | Minimum Tier 1 Capital: 7%; Minimum Total Capital (CRAR): 9% (plus Capital Conservation Buffer 2.50%). |